**SMART
        ONLINE, INC.**
 **INCENTIVE
        STOCK OPTION AGREEMENT**
  
 THIS
        INCENTIVE STOCK OPTION AGREEMENT, made and entered into as of the 20 th day of
        September, 2005, by and between Smart Online, Inc., a Delaware corporation
        (the
“ **Company** ”),
        and
        Elizabeth Marino (the “ **Participant** ”).
 
 WHEREAS,
        the committee appointed under the Smart Online, Inc. Equity Compensation
        Plan
        (the “ **Committee** ”)
        granted Participant an option to purchase shares of the Company’s Common Stock,
        $0.001 par value per share (the “ **Common
        Stock** ”),
        pursuant to the Smart Online, Inc. 2004 Equity Compensation Plan (the
“ **Plan** ”)
        (capitalized terms used herein shall have the meanings set out in the Plan
        unless otherwise specified in this Agreement); and
 
 WHEREAS,
        this Agreement evidences the grant of such option.
 
 NOW,
        THEREFORE, in consideration of the foregoing, of the mutual promises set
        forth
        below and of other good and valuable consideration, the receipt and sufficiency
        of which are hereby acknowledged, the parties hereto, intending to be legally
        bound, agree as follows:
 
 1. Grant
        of Option .
        The
        Committee hereby grants Participant an option to purchase from the Company,
        during the period specified in Section 2 of this Agreement, a total of two
        hundred (200) shares of Stock, at the purchase price of nine dollars and
        sixty
        cents ($9.60) per share (the “ **Purchase
        Price** ”),
        in
        accordance with the terms and conditions stated in this Agreement. The shares
        of
        Stock subject to the option granted hereby are referred to below as the
“Shares,” and the option to purchase such Shares is referred to below as the
“Option”.
 
 2. Vesting
        and Exercise of Option .
        The
        Option shall vest and become exercisable in increments in accordance with
        the
        five-year schedule set forth below, provided that the Option shall vest and
        become exercisable with respect to an increment as specified only if Participant
        is employed with the Company on the specified date for such
        increment:
  (a) on
        the
        first year anniversary of the Grant Date, the Option shall vest and become
        exercisable with respect to twenty percent (20%) of the Shares;
 
 (b) on
        the
        second year anniversary of the Grant Date, the Option shall vest and become
        exercisable with respect to an additional twenty percent (20%) of the
        Shares;
 
 (c) on
        the
        third anniversary of the Grant Date, the Option shall vest and become
        exercisable with respect to an additional twenty percent (20%) of the
        Shares;
  1
  (d) on
        the
        fourth anniversary of the Grant Date, the Option shall vest and become
        exercisable with respect to an additional twenty percent (20%) of the Shares;
        and
 
 (e) on
        the
        fifth anniversary of the Grant Date, the Option shall vest and become
        exercisable with respect to an additional twenty percent (20%) of the
        Shares.
 
 The
        schedule set forth above is cumulative, so that Shares as to which the Option
        has become vested and exercisable on and after a date indicated by the schedule
        may be purchased pursuant to exercise of the Option at any subsequent date
        prior
        to termination of the Option. The Option may be exercised at any time and
        from
        time to time to purchase up to the number of Shares as to which it is then
        vested and exercisable.
 
 Notwithstanding
        the foregoing, the Option shall vest and become exercisable, to the extent
        not
        already vested and exercisable, upon a Change of Control or a Corporate
        Reorganization, if the Company shall send Participant prior written notice
        of
        the effectiveness of such event and the last day on which Participant may
        exercise the Option. Participant may, upon compliance with all of the terms
        of
        this Agreement and the Plan, purchase any or all of the Shares with respect
        to
        which the Option is vested and exercisable on or prior to the last day specified
        in such notice, and, to the extent the Option is not exercised, it shall
        terminate at 5:00 P.M., eastern standard time, on the last day specified
        in such
        notice. The last day specified in the notice shall not be less than twenty
        (20)
        days after the date of the notice.
 
 3. Termination
        of Option .
        The
        Option shall remain exercisable as specified in Section 2 above until the
        earliest to occur of the dates specified below, upon which date the Option
        shall
        terminate:
 
 (a) the
        date
        all of the Shares are purchased pursuant to the terms of this Agreement;
 
 (b) in
        the
        event of Participant’s death or disability prior to Termination of Service of
        Participant, the Option shall remain exercisable until one year following
        the
        Participant’s death or disability;
 
 (c) upon
        the
        expiration of ninety (90) days following the Termination of Service of
        Participant, provided that in the event of the Participant’s death or Disability
        during such ninety (90) day period the Option shall remain exercisable until
        the
        expiration of one (1) year following the Participant’s death or
        Disability;
 
 (d) at
        5:00
        P.M., eastern standard time, on the last date specified in the notice described
        in Section 2 above, in the event of a Change of Control or Corporate
        Reorganization **,** except
        to the extent that the Option is assumed by the surviving entity or an affiliate
        thereof in connection with such Change in Control or Corporate Reorganization;
        or
 
 (e) the
        ten
        year anniversary of the Grant Date at 5:00 P.M., eastern standard
        time.
  2
  Upon
        its
        termination, the Option shall have no further force or effect and Participant
        shall have no further rights under the Option or to any Shares which have
        not
        been purchased pursuant to prior exercise of the Option.
 
 4. Manner
        of Exercise of Option .
 
 (a) The
        Option may be exercised only by (i) Participant’s completion, execution and
        delivery to the Company of a notice of exercise and, if required by the Company,
        an “ **investment
        letter** ”
as
        supplied by the Company confirming Participant’s representations and warranties
        in Section 17 of this Agreement, including the representation that Participant
        is acquiring the Shares for investment only and not with a view to the resale
        or
        other distribution thereof, and (ii) the payment to the Company, pursuant
        to the
        terms of this Agreement, of an amount equal to the Purchase Price multiplied
        by
        the number of Shares being purchased as specified in Participant’s notice of
        exercise. Participant’s notice of exercise shall be given in the manner
        specified in Section 12 but any exercise of the Option shall be effective
        only
        when the items required by the preceding sentence are actually received by
        the
        Company. The notice of exercise and the “ **investment
        letter** ”
may
        be
        in the form set forth in Exhibit
        A attached
        to this Agreement. Payment of the aggregate Purchase Price for Shares
        Participant has elected to purchase shall be made by cash or good check.
        Notwithstanding anything to the contrary in this Agreement, the Option may
        be
        exercised only if compliance with all applicable federal and state securities
        laws can be effected.
 
 (b) Subject
        to the provisions of Section 3.7 of the Plan, upon any exercise of the Option
        by
        Participant or as soon thereafter as is practicable, the Company shall issue
        and
        deliver to Participant a certificate or certificates evi-dencing such number
        of
        Shares as Participant has then elected to purchase. Such certificate or
        certificates shall be registered in the name of Participant and shall bear
        the
        legend specified in Section 16 of this Agreement and any legend required
        by any
        federal or state securities laws and by the state in which the Company is
        incorporated.
 
 5.  Definitions;
        Authority of Committee .
 
 (a) A
        “ **Change
        in Control** ”
shall
        be deemed to have occurred if, after the class of stock then subject to this
        Agreement becomes publicly traded, (i) the direct or indirect beneficial
        ownership (within the meaning of Section 13(d) of the Act and Regulation
        13D
        thereunder) of fifty percent (50%) or more of the class of securities then
        subject to this Agreement is acquired or becomes held by any person or group
        of
        persons (within the meaning of Section 13(d)(3) of the Act), but excluding
        the
        Company and any employee benefit plan sponsored or maintained by the Company,
        or
        (ii) assets or earning power constituting more than fifty percent (50%) of
        the
        assets or earning power of the Company and its subsidiaries (taken as a whole)
        is sold, mortgaged, leased or otherwise transferred, in one or more transactions
        not in the ordinary course of the Company’s business, to any such person or
        group of persons; provided, however, that a Change in Control shall not be
        deemed to have occurred upon an investment by one or more venture capital
        funds,
        Small Business Investment Companies (as defined in the Small Business Investment
        Act of 1958, as amended) or similar financial investors. For the purposes
        of
        this Agreement, the class of stock then subject to this Agreement shall be
        deemed to be “publicly traded” if such stock is listed or admitted to unlisted
        trading privileges on a national securities exchange or as to which sales
        or bid
        and offer quotations are reported in the automated system operated by the
        National Association of Securities Dealers, Inc.
  3
  
 (b) A
        “ **Corporate
        Reorganization** ”
means
        the happening of any one (1) of the following events: (i) the dissolution
        or
        liquidation of the Company; (ii) a capital reorganization, merger or
        consolidation involving the Company, unless (A) the transaction involves
        only
        the Company and one or more of the Company’s parent corporation and wholly-owned
        (excluding interests held by employees, officers and directors) subsidiaries;
        or
        (B) the shareholders who had the power to elect a majority of the board of
        directors of the Company immediately prior to the transaction have the power
        to
        elect a majority of the board of directors of the surviving entity immediately
        following the transaction; (iii) the sale of all or substantially all of
        the
        assets of the Company to another corporation, person or business entity;
        or (iv)
        an acquisition of Company stock, unless the shareholders who had the power
        to
        elect a majority of the board of directors of the Company immediately prior
        to
        the acquisition have the power to elect a majority of the board of directors
        of
        the Company immediately following the transaction; provided, however, that
        a
        Corporate Reorganization shall not be deemed to have occurred upon an investment
        by one or more venture capital funds, Small Business Investment Companies
        (as
        defined in the Small Business Investment Act of 1958, as amended) or similar
        financial investors.
 
 (c) “ **Termination
        of Service** ”
shall
        have the meaning defined in the Plan.
  (d) All
        determinations made by the Committee with respect to the interpretation,
        construction and application of any provision of this Agreement shall be
        final,
        conclusive and binding on the parties.
 
 6. Default
        Treatment .
 
 (a) The
        Option shall be construed so that it is in compliance with the requirements
        of
        section 422 of the Internal Revenue Code of 1986, as amended (the “Code”). If
        for any reason the Option does not meet the requirements of section 422 of
        the
        Code and the regulations thereunder, then the Option or any portion of the
        Option, as necessary, shall be deemed a Nonqualified Stock Option granted
        under
        the Plan.
 
 (b) If
        the
        aggregate Fair Market Value, determined on the date of grant, of the stock
        to
        which this Option and any other incentive stock options are exercisable for
        the
        first time by Participant during any calendar year under the Plan or any
        other
        stock option plan of the Company exceeds $100,000 (or such other amount as
        the
        Code may specify), the Option shall be deemed a Nonqualified Stock Option
        granted under the Plan to the extent of such excess.
 
 7. Rights
        Prior to Exercise .
        Participant will have no rights as a shareholder with respect to the Shares
        except to the extent that Participant has exercised the Option and has been
        issued and received delivery of a certificate or certificates evidencing
        the
        Shares so purchased.
  4
  
 8. Sale
        or Other Disposition by Majority Interest .
        Participant hereby irrevocably appoints the Company and its President, or
        either
        of them, as Participant’s agents and attor-neys-in-fact, with full power of
        substitution for and in Partic-ipant’s name, to sell, exchange, transfer or
        otherwise dispose of all or a portion of Participant’s Shares and to do any and
        all things and to execute any and all documents and instruments (including,
        without limitation, any stock transfer powers) in connection therewith, such
        powers of attorney not to become operable until such time as the holder or
        holders of a majority of the issued and outstanding shares of Stock of the
        Company sell, exchange, transfer or otherwise dispose of, or contract to
        sell,
        exchange, transfer or otherwise dispose of, all or a majority of the issued
        and
        outstanding shares of Stock of the Company. Any sale, exchange, transfer
        or
        other disposition of all or a portion of Participant’s Shares pursuant to the
        foregoing powers of attorney shall be made upon substantially the same terms
        and
        conditions (including sale price per share) applicable to a sale, exchange,
        transfer or other disposition of shares of Stock of the Company owned by
        the
        holder or holders of a majority of the issued and outstanding shares of Stock
        of
        the Company. For purposes of determining the sale price per share of the
        Shares
        under this Section 8, there shall be excluded the consideration (if any)
        paid or
        payable to the holder or holders of a majority of the issued and outstanding
        shares of Common Stock of the Company in connection with any employment,
        consulting, noncompetition or similar agreements which such holder or holders
        may enter into in connection with or subsequent to such sale, transfer, exchange
        or other disposition. The foregoing power of attorney shall not impose or
        be
        deemed to impose any fiduciary duty or any other duty (except as set forth
        in
        this Section 8) or obligation on either the Company or its President, shall
        be
        irrevocable and coupled with an interest and shall not terminate by operation
        of
        law, whether by the death, bankruptcy or adjudication of incompetence or
        insanity of Participant or the occurrence of any other event.
 
 9. Engagement
        of Participant .
        Nothing
        in this Agreement shall be construed as constituting a commitment, guarantee,
        agreement or understanding of any kind or nature that the Company shall continue
        to employ Participant, nor shall this Agreement affect in any way the right
        of
        the Company to terminate the employment of Participant at any time and for
        any
        reason. By Participant’s execution of this Agreement, Partici-pant acknowledges
        and agrees that Participant’s employment is “at will.” No change of
        Participant’s duties as an employee of the Company shall result in, or be deemed
        to be, a modification of any of the terms of this Agreement.
 
 10. Burden
        and Benefit; Company .
        This
        Agreement shall be binding upon, and shall inure to the benefit of, the Company
        and Participant, and their respective heirs, personal and legal representatives,
        successors and assigns. As used in this Section 10, the term the “ **Company** ”
shall
        also include any corporation which is the parent or a subsidiary of the Company
        or any corporation or entity which is an affiliate of the Company by virtue
        of
        common (although not identical) owner-ship, and for which Participant is
        providing services in any form during Participant’s employment with the Company
        or any such other corporation or entity. Participant hereby consents to the
        enforcement of any and all of the provisions of this Agreement by or for
        the
        benefit of the Company and any such other corpo-ration or
        entity.
  5
  
 
 11. Entire
        Agreement .
        This
        Agreement and the Plan under which it is issued contain the entire agreement
        between the parties with respect to the subject matter hereof and supersedes
        all
        prior agreements or understandings, oral or written, with respect to the
        subject
        matter herein. Participant accepts the Option in full satisfaction of any
        and
        all obligations of the Company to grant stock options to Participant as of
        the
        date hereof.
 
 12. Notices .
        Any and
        all notices under this Agreement shall be in writing, and sent by hand delivery
        or by certified or registered mail (return receipt requested and first-class
        postage prepaid), in the case of the Company, to its principal executive
        offices
        to the attention of the President, and, in the case of Participant, to
        Participant’s address as shown on the Company’s records.
  13. Governing
        Law .
        This
        Agreement shall be construed and enforced in accordance with the laws of
        the
        state in which the Company is incorporated, without reference to its conflicts
        of laws rules or the principles of the choice of law.
 
 14. Modifications .
        No
        change or modification of this Agreement shall be valid unless the same is
        in
        writing and signed by the parties hereto.
 
 15. Terms
        and Conditions of Plan .
        The
        terms and conditions included in the Plan, the receipt of a copy of which
        Participant hereby acknowledges by execution of this Agreement, are
        incorpo-rated by reference herein, and to the extent that any conflict may
        exist
        between any term or provision of this Agreement and any term or provision
        of the
        Plan, such term or provision of the Plan shall control.
 
 16. Stock
        Legend .
        All
        certificates for Shares issued by the Company to Participant or Participant’s
        successors and assigns or to any other person becoming a signatory to this
        Agreement shall be endorsed with legends in substantially the following form,
        and any transfer agent of the Company may be instructed to require compliance
        with all legends on such certificates:
 
 The
                  shares represented by this Certificate have not been registered
                  under the
                  Securities Act of 1933, as amended (the “Act”), or any state securities
                  law. Accordingly, the shares represented by this Certificate may
                  not be
                  sold, offered for sale, transferred, pledged or hypothecated without
                  an
                  effective registration statement for such shares under the Act
                  or
                  applicable state securities law or an opinion of counsel satisfactory
                  to
                  the Company that registration is not required under the Act or
                  any
                  applicable state securities
                  law.
  6
  
 17. Covenants
        and Representations and Covenants of Participant .
 
 Participant
        represents, warrants, covenants and agrees with the Company as follows:
 
 (a) The
        Option is being received for Participant’s own account without the participation
        of any other person, with the intent of holding the Option and the Shares
        issuable pursuant thereto for investment and without the intent of
        participating, directly or indirectly, in a distribution of the Shares and
        not
        with a view to, or for resale in connection with, any distribution of the
        Shares
        or any portion thereof.
 
 (b) Participant
        is not acquiring the Option or any Shares based upon any representation,
        oral or
        written, by any person with respect to the future value of, or income from,
        the
        Shares, but rather upon an independent examination and judgment as to the
        prospects of the Company.
 
 (c) Participant
        has had the opportunity to ask questions of and receive answers from the
        Company
        and its executive officers and to obtain all information necessary for
        Participant to make an informed decision with respect to the investment in
        the
        Company represented by the Option and any Shares issued upon its
        exercise.
 
 (d) Participant
        is able to bear the economic risk of any investment in the Shares, including
        the
        risk of a complete loss of the investment, and Participant acknowledges that
        Participant must continue to bear the economic risk of any investment in
        Shares
        received upon exercise of the Option for an indefinite period.
 
 (e) Participant
        understands and agrees that the Shares subject to the Option may be issued
        and
        sold to Participant without registration under any state or federal laws
        relating to the registration of securities and in that event will be issued
        and
        sold in reliance on exemptions from registration under appropriate state and
        federal laws.
 
 (f) Shares
        issued to Participant upon exercise of the Option will not be offered for
        sale,
        sold or transferred by Participant other than pursuant to: (i) an effective
        registration under applicable state securities laws or in a transaction which
        is
        otherwise in compliance with those laws; (ii) an effective registration under
        the Securities Act of 1933, or a transaction otherwise in compliance with
        such
        Act; and (iii) evidence satisfactory to the Company of compliance with all
        applicable state and federal securities laws. The Company shall be entitled
        to
        rely upon an opinion of counsel satisfactory to it with respect to compliance
        with the foregoing laws.
 
 (g) The
        Company will be under no obligation to register the Shares issuable pursuant
        to
        the Option or to comply with any exemption available for sale of the Shares
        by
        Participant without registration, and the Company is under no obligation
        to act
        in any manner so as to make Rule 144 promulgated under the Securities Act
        of
        1933 available with respect to any sale of the Shares by
        Participant.
  7
  
 (h) Participant
        has not relied upon the Company with respect to any tax consequences related
        to
        the grant or exercise of this Option, or the disposition of Shares purchased
        pursuant to its exercise. Participant acknowledges that, as a result of the
        grant and/or exercise of the Option, Participant may incur a substantial
        tax
        liability. Participant assumes full responsibility for all such consequences
        and
        the filing of all tax returns and elections Participant may be required or
        find
        desirable to file in connection therewith. In the event any valuation of
        the
        Option or Shares purchased pursuant to its exercise must be made under federal
        or state tax laws and such valuation affects any return or election of the
        Company, Participant agrees that the Company may determine such value and
        that
        Participant will observe any determination so made by the Company in all
        returns
        and elections filed by Participant. In the event the Company is required
        by
        applicable law to collect any withholding, payroll or similar taxes by reason
        of
        the grant or any exercise of the Option, Participant agrees that the Company
        may
        withhold such taxes from any monetary amounts otherwise payable by the Company
        to Participant and that, if such amounts are insufficient to cover the taxes
        required to be collected by the Company, Participant will pay to the Company
        such additional amounts as are required.
 
 (i) The
        agreements, representations, warranties and covenants made by Participant
        herein
        with respect to the Option shall also extend to and apply to all of the Shares
        issued to Participant from time to time pursuant to exercise of the Option.
        Acceptance by Participant of any certificate representing Shares shall
        constitute a confirmation by Participant that all such agreements,
        representations, warranties and covenants made herein shall be true and correct
        at that time.
 
 (j) In
        the
        event any underwriter of securities of the Company requests Participant to
        sign
        any agreement restricting resale of the Shares in connection with any public
        offering by the Company, Participant agrees to sign such agreement, provided
        the
        officers of the Company have signed an agreement no less restrictive. The
        Company may instruct its transfer agent not to transfer the Shares if requested
        by an underwriter as described above.
 
 (k) Participant
        hereby agrees to comply with any plan, policy or other document of the Company
        approved by the Board of Directors of the Company to ensure compliance with
        securities laws, rules and regulations both during the term of employment
        of
        Participant and for one (1) year thereafter. The Company may impose
        stop-transfer restrictions with respect to Shares acquired upon exercise
        of the
        Options to enforce this provision.
 
 (The
        remainder of this page is intentionally left blank.)
 
 
  8
  IN
        WITNESS WHEREOF, the parties hereto have caused this Award Agreement to be
        executed effective as of the day and year first above written.
 
 
 **SMART
        ONLINE, INC.**
 
  
 By:_____________________________________
 Print
        Name:
 
 
 
 **PARTICIPANT:**
 
 
 
 By:_____________________________________
 Print
        Name:
 
 
  9
  **EXHIBIT
        A**
 
 
 
 Attention:
        Equity Compensation Plan Committee
 Smart
        Online, Inc.
 Post
        Office Box 12794
 Research
        Triangle Park, North Carolina 27709-2794
 
 Re:  Exercise
        of Incentive Stock Option
 
 Dear
        Committee Members:
 
 Pursuant
        to the terms and conditions of that certain Incentive Stock Option Agreement
        dated as of _______________, 20_____ (the “ **Agreement** ”)
        between
 _________________________
        and Smart Online, Inc. (the “ **Company** ”),
        I
        desire to purchase ____________ Shares of the Stock of the Company and hereby
        tender payment in full for such Shares in accordance with the terms of the
        Agreement.
 
 I
        hereby
        reaffirm that the representations and warranties made in Section 17 of the
        Agreement are true and correct on the date hereof as if made on the date
        hereof.
 
 
 Very
        truly yours,
 
  
 Print
        Name:
 
 Date:
        __________________________